The United States doesn't have a VAT, or value-added tax, but the European Union does. The way it works is this: Suppose someone sells logs to a lumber mill, which turns the logs into lumber. The mill sells the lumber to a furniture maker, which sells you a wooden table. Each time the wood changes hands, the buyer pays VAT on the purchase. If you export goods into Europe, they'll be subject to VAT there. The VAT invoice helps companies figure their VAT correctly.
The VAT System
When a business sells an item or service subject to VAT, it collects the tax from the buyer, just as U.S. stores collect sales tax. Rather than send in everything it collects, however, the company first deducts any VAT on its purchases in the same accounting period. For example, suppose a business receives €500 in tax from its customers but also spent €300 paying VAT on its own purchases. The company only sends in €200.
Every time a company sells a VAT product, it should provide the buyer with a VAT invoice. The invoice shows the amount of tax the buyer pays. The seller likewise receives VAT invoices from its own vendors. When the time comes for a company to send the government its payment, the invoices provide an accurate record of VAT received and spent.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.